Restraining Government in America and Around the World

Another Reason Why Welfare Is Economically Destructive

I’m normally not a big fan of the Paris-based Organization for Economic Cooperation and Development since it is an international bureaucracy that persecutes low-tax jurisdictions. But the economists at the OECD sometimes do good work (the same can be said of the IMF and World Bank, not that this justifies taxpayers subsidies for any international bureaucracy). Here’s a good example. While researching tax rates in different nations, I came across this description of how welfare programs and other income-redistribution schemes result in punitively-high implicit tax rates on productive behavior for low-income people. The result, of course, is that many people are discouraged from working and lured into lives of dependency. The article is not recent, so the specific examples may no longer be accurate, but the economic analysis is spot on and still applies. The economic damage described in the article, by the way, is in addition to the harm caused by high explicit tax rates on taxpayers who finance the income redistribution and the harm caused by government spending diverting resources from the productive sector of the economy.

Another rather curious situation which does not show up when studying headline rates is that low earners can find themselves confronted with very high marginal tax rates, in some rare cases exceeding 100%. The reason for this is that lower earners not only pay more tax when their income goes up, but in many cases they lose part of their means-tested tax relief, subsidies and benefits as well. The loss of this income acts as an “implicit” tax at the margin. The rational response of workers who find themselves in this situation is to reduce the number of hours they work. Their gross wage would of course be lower if they did, but in return they would pay less tax and receive more means-tested subsidies and benefits. As a result, their net disposable income would increase despite putting in fewer hours. This type of situation occurs to varying degrees in different OECD countries, depending on the peculiarities of various social protection programmes. Take the example of an unemployed couple with two young children. Suppose that after five years’ unemployment, one of them takes up a lowly paid job. In Finland or Sweden net income in and out of work would be the same in that case, since each unit of income earned is cancelled out by a unit of benefits foregone once employment is taken up. In other words, there is an implicit tax rate of 100%. In the case of Denmark and the Czech Republic, the implicit rate in a similar case would be almost 100%, and in Germany and the United Kingdom it would be around 80%. In France and the United States the implicit rate would be about 50%, since half the increase in earnings is wiped out by a loss of benefits. In Japan, the implicit tax actually exceeds 140%, meaning our one-earner couple would be worse off with the new job than without it. What’s more, they may have to be wary when it comes to staying in the job itself, since small wage increases can expose low-wage earners to high implicit tax rates as their means-tested benefits get cut further.

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“Rare cases”??? They are going to be a lot more common than people think…A new reality is dawning for America soon.

Peek just 3 years into the future:

It is 2014, you make $88,000/year and thus, under Obamacare, other people are now paying a significant portion of your healthcare (i.e. you get an approximately 60% subsidy on your healthcare premiums, in other words, a subsidy of approximately $12,000 per year for a family of 4). You are foolish enough to do some extra work just for two weekends a year (a speaking engagement, writing some software for a company etc.) and make an extra $1000. Well, you are a fool! At $89,000/year you just lost your $12,000 subsidy. What is the marginal tax rate on those extra $1000? Seems like it is just a mere 1200% !!!??!!.

So who will pay for all that? (a) Productive people who make more than 88k/year (racking their brains to come up with iPads, medical advances, etc.) as well as (b) everybody who works for a company, since the company will now be saddled with the extra taxes (implicit and explicit) to finance the Obamacare transfers.

Sluggish economy beyond 2014? Languishing salaries? Of course! Because people who create the most jobs and the exceptional products are just taking it easier these days. Welcome to the European production incentives. Americans have learned nothing from the European continent where the most competent citizens on earth squander their superior potential in the Welfare State and languish at 1.5% growth rates.

Voters grossly underestimate the extent to which people will restructure their lives to take advantage of the wealth transfer.

Confiscation of wealth at the high end + incentives not to work at the mid and low end + administrative costs of redistribution + corruption infiltrating when government becomes the monopoly allocator of wealth. That’s 4 kicks below the belt for American GDP.

Welcome to American decline. Growing at European rates of 1.5% in a world that, on average, grows at 4% leads, deterministically, to economic marginalization pretty fast. And that is the optimistic scenario. A more sudden “Mother of all Crises” is more likely. Greece was nothing. That was just the magnitude 3 pre-quake before the Big One.

[…] For instance, let’s assume a government spends $1 billion on some sort of redistribution program. Extracting that money from the productive sector of the economy obviously will cause some damage, but it’s also important to estimate how the supposed beneficiaries of the money will react. What if they decide to earn less income in order to be eligible for the handouts, as even the statists at the OECD have recognized? […]

[…] For instance, let’s assume a government spends $1 billion on some sort of redistribution program. Extracting that money from the productive sector of the economy obviously will cause some damage, but it’s also important to estimate how the supposed beneficiaries of the money will react. What if they decide to earn less income in order to be eligible for the handouts, as even the statists at the OECD have recognized? […]

[…] To help make the case, I’ve cited research from international bureaucracies such as the Organization for Economic Cooperation and Development, International Monetary Fund, World Bank, and European Central Bank. And since most of those […]

[…] eternal. To assistance make a case, I’ve cited investigate from general bureaucracies such as a Organization for Economic Cooperation and Development, International Monetary Fund, World Bank, and European Central Bank. And given many of those […]

[…] eternal. To help make the case, I’ve cited research from international bureaucracies such as the Organization for Economic Cooperation and Development, International Monetary Fund, World Bank, and European Central Bank. And since most of those […]

[…] To assistance make a case, I’ve cited investigate from general bureaucracies such as the Organization for Economic Cooperation and Development, International Monetary Fund, World Bank, andEuropean Central Bank. And given many of those […]

[…] For instance, let’s assume a government spends $1 billion on some sort of redistribution program. Extracting that money from the productive sector of the economy obviously will cause some damage, but it’s also important to estimate how the supposed beneficiaries of the money will react. What if they decide to earn less income in order to be eligible for the handouts, as even the statists at the OECD have recognized? […]

[…] Cooperation and Development because the Paris-based bureaucracy has such statist impulses. But even the OECD has written about the negative impact of overly generous welfare programs on incentives for productive behavior. Rate this:Share […]

[…] Cooperation and Development because the Paris-based bureaucracy has such statist impulses. But even the OECD has written about the negative impact of overly generous welfare programs on incentives for productive […]

[…] Cooperation and Development because the Paris-based bureaucracy has such statist impulses. But even the OECD has written about the negative impact of overly generous welfare programs on incentives for productive […]

[…] Cooperation and Development because the Paris-based bureaucracy has such statist impulses. But even the OECD has written about the negative impact of overly generous welfare programs on incentives for productive […]

[…] the negative impact of excessive government spending from international bureaucracies such as the Organization for Economic Cooperation and Development, International Monetary Fund, World Bank, and European Central Bank. And since most of those […]

[…] the negative impact of excessive government spending from international bureaucracies such as the Organization for Economic Cooperation and Development, International Monetary Fund, World Bank, and European Central Bank. And since most of those […]